Islamic preference shares

Muhammad saiful mohd noor 205328

1.definition
Malaysian company act 1965- a share that does not give right to the shareholder to vote at its general meeting or any right to participate in any distribution of the company that has stated the amount,whether through dividend, redemption and so on.

Cont..
Under Section 66 (1) of the Act- no company shall allocate any preference shares or convert any issued shares into preference shares unless there is set out in its memorandum or articles the rights of the holders of those shares with respect to repayment of capital, participation in surplus assets and profits, cumulative or noncumulative dividends, voting, and priority of payment of capital and dividend in relation to other shares or other classes of preference

2. Types of preference shares

a)Cumulative or non-cumulative preference shares A cumulative preference shareholder is entitled to receive a fixed cumulative preference dividend right. If in any year dividend is not paid, the cumulative preference shareholder is entitled to have the equal amount of the unpaid dividend added to the dividend to be paid in the following year(s).

Cont..
(B)Participating or non-participating preference shares
participating preference shares entitle the holder to a return in excess of the stated fixed preference dividend rate by participating in the distribution of profits available to ordinary shareholders
(C) Redeemable or irredeemable preference shares Section 61(1) of the Act provides that a company may, if so authorised by its articles, issue preference shares which are, at the option of the company are to be liable to be redeemed and the redemption shall be affected only on such terms and in such manner as is provided by its articles. Section 61(3) of the Act provides that the preference shares shall not be redeemed:

Cont..
(d) Convertible or non-convertible preference
shares

convertible preference shares allow or require the preference shares to be converted into ordinary shares at the end of the term or upon the happening of a particular event.

3. Opinion of shariah scholars

seem to disapprove preference shares due to the following priorities given to the preference shareholders over the ordinary shareholders: (i) priority of payment of dividend (ii) priority of payment of capital upon liquidation.

Nevertheless, many seem to approve preference shares with some modification

Cont..
The Securities Commission (SC) Shariah Advisory Council (SAC) ruled that noncumulative preference shares are permissible based on tanazul where the right to profit of the ordinary shareholder is willingly given to a preference shareholder. Tanazul is agreed upon at an annual general meeting of the company which decides o issue preference shares in an effort to raise new capital. As it agreed at the meeting to issue preference

It is to be noted that some Shariah scholars are of the view that the ordinary shareholders can only surrender their rights to a share of the profits, based on partnership, by giving priority to preference shareholders upon the dividend is declared by the company. Contrary to SACs view, such surrender of rights cannot be given upfront and must be given upon each declaration of dividend by the company.

4. Characteristics of preference share